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Pattie Lovett-Reid

Chief Financial Commentator, CTV

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There are many Canadians deep into debt with mortgages, student loans and lines of credit but that doesn’t mean that you can’t tuck a little money away for other goals in your life.

Rather than thinking about debt and saving in isolation, think about whether you can pay down debt and save some money at the same time. After all, the ultimate goal is to improve your balance sheet each day.

As Michael Sprung, president of Spring Investment Management, said in our chat Wednesday: Like how a company aims to optimize its balance sheet, you should do that on a personal level too.

To be fair it’s not easy, but the best way to take on the challenge is to be very clear on the type of debt you have:

High-Interest Debt

This is your credit card. High interest is relative, but anything above 10 per cent is a good candidate for this category. Carrying any kind of balance on your credit card or similar high-interest vehicle makes paying it down a priority before starting to invest.

Low-Interest Debt

This type of low-interest debt may often be a car loan, a line of credit or a personal loan from a bank. The interest rates are usually described as prime plus or minus a certain percentage.  

Tax-Deductible Debt

If there is such a thing as good debt, this is it: Tax-deductible debts such investment loans. It’s a classic example of optimizing your balance sheet. Since this debt is generally low interest as well, you can easily build a portfolio while paying it down.

If you don't have high-interest debt or, better yet, all your debts are tax deductible, then you have some flexibility.  If you do have high-interest debt, you'll likely want to focus on paying it off before you begin your investment adventure.

We often talk about diversifying your investment portfolio. You should also seek to diversify your debt portfolio and consolidate at the lowest rate you can.

Getting the biggest bang for your buck isn’t as simple as the rate associated with the debt compared to the potential return from an investment – the wildcard here is time and compounding. However, there is no guarantee you will get the anticipated returns. Time and compounding works when you invest – but destroys your financial plan when you owe money.

The bottom line is, you can invest when you have debt. There is a big psychological advantage to doing so, as it not only uses every dollar to maximize its potential growth – it also makes one feel in control of their financial future.